MANAGERIAL ACCOUNTING CONCEPTS AND PRINCIPLES Chapter 18 © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved C1 PURPOSE OF MANAGERIAL ACCOUNTING McGraw-Hill/Irwin Slide 2 C1 NATURE OF MANAGERIAL ACCOUNTING Exh. 18-2 Financial Accounting Managerial Accounting Investors, creditors and other external users Managers, employees and other internal users 2. Purpose of information Making investment, credit and other decisions Planning and control decisions 3. Flexibility of practice Structured and often controlled by GAAP Relatively flexible (no GAAP) 4. Timeliness of information Often available only after audit is complete Available quickly without need to wait for audit 5. Time dimension Historical information with some predictions Many projections and estimates 6. Focus of information Emphasis on whole organization Projects, processes and segments of an organization 7. Nature of information Monetary information Monetary and nonmonetary information 1. Users and decision makers McGraw-Hill/Irwin Slide 3 C2 MANAGERIAL ACCOUNTING IN BUSINESS Lean Business Model Customer Orientation Global Economy Lean Business Model Elimination of Waste McGraw-Hill/Irwin Satisfy the Customer Positive Return Slide 4 C2 LEAN PRACTICES Customer Orientation in a Global Economy McGraw-Hill/Irwin Slide 5 FRAUD AND ETHICS IN MANAGERIAL ACCOUNTING C3 Fraud involves the use of one’s job for personal gain through the deliberate misuse of the employer’s assets. There are many types of fraud, but common characteristics of all fraud are that it: • Is done to provide direct or indirect benefit to the employee. • Violates the employees’ duties to his employer. • Costs the employer money. • Is secret. Fraud increases business costs. Management relies on internal control systems to monitor business activities and on accounting systems to track costs and identify unexpected amounts. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. The Institute of Management Accountants has issued a code of ethics to help accountants involved in solving ethical dilemmas. McGraw-Hill/Irwin Slide 6 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY BEHAVIOR Cost behavior refers to how a cost will react to changes in the level of business activity. Cost C4 • Total fixed costs do not change when activity changes. Cost Activity • Total variable costs change in proportion to activity changes. Activity Cost • Mixed costs are combinations of fixed and variable costs. McGraw-Hill/Irwin Activity Slide 7 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY TRACEABILITY C4 Direct costs Costs traceable to a single cost object. Examples: material and labor cost for a product. McGraw-Hill/Irwin Indirect costs Costs that cannot be traced to a single cost object. Example: A maintenance expenditure benefiting two or more departments. Slide 8 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY RELEVANCE C4 Sunk costs have already been incurred and cannot be avoided or changed. Sunk costs should not be considered in decisions. Example: An automobile purchased two years ago cost $15,000. The $15,000 cost is sunk because whether the car is driven, sold, traded, or abandoned, the cost will not change. Out-of-pocket costs require future outlays of cash. Out-of-pocket costs should be considered in decisions. Example: You plan on buying a new car for $25,000 next month. The cost of the new car is an out-of-pocket cost because you can choose to spend or not to spend the $25,000 next month. McGraw-Hill/Irwin Slide 9 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY RELEVANCE C4 An opportunity cost is the potential benefit lost by choosing a specific action from two or more alternatives Example: If you were not attending college, you could be earning $20,000 per year. Your opportunity cost of attending college for one year is $20,000. McGraw-Hill/Irwin Slide 10 TYPES OF COST CLASSIFICATIONS CLASSIFICATION BY FUNCTION C5 Direct Labor Direct Material Manufacturing Overhead Product Period costs are expenses not attached to the product. Selling costs are incurred to obtain orders and to deliver finished goods to customers. McGraw-Hill/Irwin Administrative costs are non-manufacturing costs of staff support and administrative functions. Slide 11 C5 PERIOD AND PRODUCT COSTS IN FINANCIAL STATEMENTS Period Costs (Expenses) 2009 Income Statement Operating Expenses 2009 Costs Incurred Cost of Goods Sold Inventory Sold in 2009 Product Costs (Inventory) Inventory Not Sold in 2009 McGraw-Hill/Irwin 2010 Balance Sheet Inventory Raw Materials Goods in Process Finished Goods Exh. 18-8 2010 Income Statement Cost of Goods Sold Slide 12 MANUFACTURER’S BALANCE SHEET C6 Raw Materials Goods in Process Finished Goods Materials waiting to be processed. Partially complete products. Completed products for sale. Can be direct or indirect. Material to which some labor and/or overhead have been added. McGraw-Hill/Irwin Slide 13 C6 MANUFACTURER’S INCOME STATEMENT Exh. 18-11 Merchandiser Manufacturer Beginning Merchandise Inventory Beginning Finished Goods Inventory + + Cost of Goods Purchased _ The major difference Ending Merchandise Inventory = McGraw-Hill/Irwin Cost of Goods Manufactured _ Ending Finished Goods Inventory Cost of Goods Sold = Slide 14 ACTIVITIES AND COST FLOWS IN MANUFACTURING C7 Exh. 18-15 Materials activity Production activity Sales activity Raw Materials Beginning Inventory Goods in Process Finished Goods Raw Materials Purchases Factory Overhead McGraw-Hill/Irwin Beginning Inventory Beginning Inventory Direct Labor Cost of Goods Manufactured Raw Materials Used Finished Goods Ending Inventory Raw Materials Goods in Process Ending Inventory Ending Inventory Cost of Goods Sold Slide 15 CYCLE TIME AND CYCLE EFFICIENCY A1 Order Received Wait Time Production Started Goods Shipped Process Time + Inspection Time + Move Time + Queue Time Manufacturing Cycle Time Total Cycle Time Manufacturing Cycle = Efficiency McGraw-Hill/Irwin Value-added time Manufacturing cycle time Slide 16 END OF CHAPTER 18 McGraw-Hill/Irwin Slide 17